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Dissecting the cycle: a methodological investigation

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  • Harding, Don
  • Pagan, Adrian

Abstract

Macroeconomics has a long tradition of inspecting and interpreting patterns in graphs of aggregate data. However, the move towards more precise quantification of macroeconomic phenomena has seen academics shift away from a study of turning points, which are a natural and obvious way of summarizing business cycles, towards measures of co-movement in detrended series. This shift arise from several developments, but an important one was the belief among academics that Burns and Mitchell's methods lacked the statistical basis and, hence, the precision required in modern macroeconomics. We adopt the older perspective that business cycles are to be defined in terms of the turning points in the level of economic activity. We show that such turning points can be associated with a well defined sequence of outcomes and can therefore be precisely analyzed. In turn this enables us to explore how various parametric models of aggregate output generate a cycle through the interaction of trend movements in activity with the volatility and serial correlation in growth rates. One of the strongest points in the rhetoric of modern business cycle theory is that trend and cycles should not be divorced. Consequently, any definition of the business cycle in terms of the co-movement of detrended data has to find the task of integration a difficult one. In contrast, we show that a return to the older tradition of studying the classical cycle in the level of economic activity produces a natural interpretation of the origin of the cycle in terms of the interaction of trend and the second moments of growth rates. This seems a critical advantage for the approach taken in this paper. An important issue that has also been debated in the literature is whether non-linear models are required to make a business cycle. Using the techniques developed in this paper we dissect the cycle of a number of countries and find little evidence that non-linearities, of the type investigated in the literature, a

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 49 (2002)
Issue (Month): 2 (March)
Pages: 365-381

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Handle: RePEc:eee:moneco:v:49:y:2002:i:2:p:365-381

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Web page: http://www.elsevier.com/locate/inca/505566

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References

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  1. Don Harding & Adrian Pagan, 1999. "Knowing the Cycle," Melbourne Institute Working Paper Series wp1999n12, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  2. Burnside, Craig, 1998. "Detrending and business cycle facts: A comment," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 513-532, May.
  3. Lucas, Robert E, Jr, 1980. "Methods and Problems in Business Cycle Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 696-715, November.
  4. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory 93-10, Federal Reserve Bank of San Francisco.
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  7. Canova, Fabio, 1994. "Detrending and turning points," European Economic Review, Elsevier, vol. 38(3-4), pages 614-623, April.
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  9. Francis X. Diebold & Glenn D. Rudebusch, 1994. "Measuring Business Cycles: A Modern Perspective," NBER Working Papers 4643, National Bureau of Economic Research, Inc.
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  12. Harding, Don, 1997. "The Definition, Dating and Duration of Cycles," MPRA Paper 3357, University Library of Munich, Germany.
  13. Pagan, Adrian, 1997. "Policy, Theory, and the Cycle," Oxford Review of Economic Policy, Oxford University Press, vol. 13(3), pages 19-33, Autumn.
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  17. Simkins, Scott P., 1994. "Do real business cycle models really exhibit business cycle behavior?," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 381-404, April.
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  20. Ilse Mintz, 1972. "Dating American Growth Cycles," NBER Chapters, in: Economic Research: Retrospect and Prospect Vol 1: The Business Cycle Today, pages 39-88 National Bureau of Economic Research, Inc.
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  23. Wen, Yi, 1998. "Can a real business cycle model pass the Watson test?," Journal of Monetary Economics, Elsevier, vol. 42(1), pages 185-203, June.
  24. Kim, Kunhong & Buckle, R A & Hall, V B, 1994. "Key Features of New Zealand Business Cycles," The Economic Record, The Economic Society of Australia, vol. 70(208), pages 56-73, March.
  25. Sichel, Daniel E, 1994. "Inventories and the Three Phases of the Business Cycle," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 269-77, July.
  26. Arthur F. Burns & Wesley C. Mitchell, 1946. "Measuring Business Cycles," NBER Books, National Bureau of Economic Research, Inc, number burn46-1, May.
  27. Hess, Gregory D & Iwata, Shigeru, 1997. "Measuring and Comparing Business-Cycle Features," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(4), pages 432-44, October.
  28. Gerhard Bry & Charlotte Boschan, 1971. "Foreword to "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs"," NBER Chapters, in: Cyclical Analysis of Time Series: Selected Procedures and Computer Programs, pages -1 National Bureau of Economic Research, Inc.
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